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Rating Action:

Moody's upgrades SANEPAR's debentures to A3.br from Baa3.br

 The document has been translated in other languages

18 Sep 2006
Moody's upgrades SANEPAR's debentures to A3.br from Baa3.br

Sao Paulo, September 18, 2006 -- Moody's America Latina upgraded Companhia de Saneamento do Parana - SANEPAR's (SANEPAR) senior unsecured debentures to Ba3 from B1 on the global scale and to A3.br from Baa3.br on the Brazilian national scale. The rating outlook is stable.

The upgrade was prompted by the improved stand-alone credit risk profile of SANEPAR. The upgrade reflects strong financial ratios, including funds from operations (FFO) to total adjusted debt of approximately 30% and total adjusted debt to capitalization of about 36%. SANEPAR has been able to improve its financial performance during a period of substantial investments to expand water and sewage services, due to annual increases in rates and financial support from the controlling shareholder, the state of Parana, in the form of advances and reduced dividends.

With 60% of its voting shares owned by the state of Parana ("State"), SANEPAR is a government-related issuer (GRI) in accordance with Moody's rating methodology entitled "The Application of Joint Default Analysis to Government-Related Issuers". Moody's methodology for GRIs systematically incorporates into the rating the company's stand-alone credit risk profile or Baseline Credit Assessment (BCA) as well as the likelihood that a government would provide extraordinary support for the company's debt obligations. The ratings of SANEPAR result from the application of joint-default analysis using the company's BCA, a credit assessment of the State of Parana, Moody's view of dependence (the likelihood that both entities would default at the same time), and probability of extraordinary support from the controlling shareholder. The BCA of a GRI is expressed on a 1-21 scale, corresponding to the 21 ratings ranging from Aaa to C. Please refer to Moody's special comments "Rating Government-Related Issuers in Americas Corporate Finance" and "Government-Related Issuers: July 2006 Update" on moodys.com for additional information on GRIs.

The upgrade of SANEPAR reflects an improvement of its BCA to 13 from 14. In addition, the rating action also reflects Moody's revised view of medium default dependence (from previously high) and medium support (from previously low). The change in expected support level reflects our view that positive changes in SANEPAR's relationship with the State, including annual rates increases approved by the governor, State guarantees for about 18% of the company's debt, capital injections and lowered dividends, have exceeded negative factors that include rate reductions for disadvantaged customers and the deferral of rate adjustments in 2006. The revision of the support level to medium also reflects the view that the essential nature of SANEPAR's services provides substantial incentive for the State to support the company in a distress situation. Moody's view of reduced dependence level recognizes the improved credit metrics of SANEPAR in recent years that make the company less likely to be affected in the event of a default by the State.

SANEPAR's A3.br national scale rating reflects the standing of the company's credit quality relative to its domestic peers. Although SANEPAR has stronger financial ratios than some higher rated issuers, such as regulated electricity distribution companies Empresa Energetica do Mato Grosso do Sul -- Enersul (A2.br) and Rio Grande Energia (Aa2.br), its A3.br rating reflects the higher risk from its essentially unregulated operations and risks deriving from SANEPAR's investment program to expand its services. Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs in Brazil are designated by the ".br" suffix. NSRs differ from global scale ratings in that they are not globally comparable to the full universe of Moody's rated entities, but only with other rated entities within the same country.

The stable outlook incorporates Moody's expectation that SANEPAR will maintain moderate operational leverage and sufficient liquidity during the execution of its aggressive investment program.

Headquartered in Curitiba, Brazil, Companhia de Saneamento do Parana - SANEPAR provides water treatment and distribution to over 2.2 million customers or 8.2 million consumers, and wastewater collection and treatment services to about one million clients or 3.9 million consumers in 343 municipalities in the state of Parana and one municipality in the state of Santa Catarina. In the twelve months ending June 30, 2006 SANEPAR reported net earnings of BRL 173 million (about USD 77 million) on BRL 1,144 million (USD 509 million) of revenues.

Sao Paulo
Richard Sippli
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
55-11-3043-7300

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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